30 years ago, forecasting port capacity was a fairly
straightforward exercise, and a popular one at that, among young students:
population, GDP and trade data, together with a simple regression model, would
easily do the trick with some excellent results. It should be remembered that,
in those days, demand for port services was more or less captive and a cargo destined for, say, Italy would in all
likelihood land at an Italian port, as close as possible to the final consignee.
Two things changed this picture since: containerization and
the ‘through transport’ concept on the one hand, and the development of
extensive land transport infrastructure on the other. Europe, dilapidated by a
ruinous war, was being rebuilt, and what better way of doing this than
developing your roads and railroads before anything else. If one were to take a
cursory look at Europe’s map today, what one would see wouldn’t differ much
from a nice dish of Italian spaghetti. Roads and railroads, together with European
economic integration, free trade, and the abolition of national borders, opened
up the market for port services. Before we knew it, any Asian cargo could in
principle reach any European destination, passing through any gateway port
around Europe. Port demand was no longer captive
and ports started to compete for survival.
To do so, ports had to modernize and develop new capacity;
often much more than what was needed. In the 1990s, I remember well, the northern range European ports (from Le
Havre to Hamburg) had a collective excess capacity of about 40%. Usually, port
capacity is developed in big chunks,
each time far ahead of existing demand. A combination of factors can explain
this, ranging from the availability of easy and cheap public finance, to
managerial egos and port managers’ heartburning desire to leave their footprint
in history... One more reason, of course, is economies
of scale in port construction: apparently, it’s much cheaper to build two
kilometers of quay rather than one.
Excess port capacity, over and above national demand
requirements, is created for three more reasons. First is the economies of scale mentioned above, as
well as the infamous economic law of Jean-Baptiste Say according to which supply creates its own demand. In other
words, once the port is there, the customer is bound to arrive. Unfortunately,
this is not always so. The second reason is the footloose nature of the container and its carrier, which may switch
ports at the whim of a moment, whenever capacity is scarce and, as a result,
the ship may have to wait. Finally, excess capacity is developed in order to
capture transshipment traffic; i.e. somebody else’s cargo! As a matter of fact,
most of the competition taking place among ports today is for this type of
cargo; to capture it, ports often underprice
concession fees agreed with terminal
operators, and terminal operators, in their turn, underprice terminal handling
charges (THC) they charge to carriers (often through hidden or opaque discounts).
[by underpricing I refer to port dues
and concession fees below the opportunity cost of port land].
Moreover, especially in ports where the management is
responsible for its bottom line, more often than not the management tends to
cross-subsidize footloose
transshipment traffic with captive domestic
traffic. In other words, domestic (national) cargoes are penalized through
relatively higher prices, compared to
transshipment cargo, in the management’s
anxiety to capture more of the latter. In a number of cases, some of which already heard in front of a judge (cf. Sarlis vs. MSC at the port of Piraeus) , the preferential treatment of
transshipment cargo goes beyond price
and it involves other terms of service, such as berth allocations and
time-windows. For a number of reasons this is not right and I have always
advised affected local shippers to present their case at the national
competition authorities or, in case of complacency, directly to the Competition
Directorate General of the European Commission.
And here is why this type of cross-subsidization, or price
discrimination, between domestic and transshipment cargo is not right:
If sufficient domestic
demand for port services does not exist, developing port capacity for
transshipment purposes is risky business just because of the footloose nature of the container. Before
you know it, you could find yourself with a ghost port in your hands, as it
happened recently, for instance, at the Italian port of Taranto, when Evergreen
decided to move to Piraeus, in spite of a 60 year-long concession at the
Italian port. Years back, I remember quite vividly the crisis that developed at
the great port of Singapore, when Maersk decided to move just around the
corner, to the Malaysian port of Tanjung Pelepas. The graph above shows that,
in the northern range of European ports, transshipment represents, wisely, no
more that 40% of their throughput, vis à
vis transshipment ports like Malta, Singapore, Damietta or Kingston.
In comparison to the economic impacts of domestic traffic,
transshipment creates relatively less (local) value added. To draw a parallel,
a port handling domestic cargo resembles a city-center hotel, where the visitor
will most likely spend money on a number of activities (museums, restaurants,
etc.), thus creating considerable value added for the city, vis à vis a highway motel
(transshipment), where the traveler would stop there just for a sleep. I often
hear my friends in Antwerp telling me that the port of Antwerp, as a result of
its multipurpose/labor-intensive character, creates four times more value added
than Rotterdam, the latter port being a highly automated/labor-saving one.
Thus, I am told, the Belgian taxpayer is much happier to pay taxes for port
development than his Dutch counterpart, who has often questioned the social
utility of developing more port capacity at Rotterdam. Exceptions to the above
do of course exist, and Rotterdam is a good one: the port’s value added is not
created simply by the port itself, but by its port cluster, encompassing 50% of Europe’s Asian and North American
European Distribution Centers (EDC);
a city 50% of whose inhabitants are holders of a foreign passport, just because
of the port. But not all ports can realistically aspire to such an enviable
situation, developed not today but over a period of 70 years of hard work.
Finally, publicly funded ports are developed exactly in
order to have these domestic impacts
on business and employment, rather than to steal
(transshipment) traffic from their neighbor, particularly in economically
interdependent geographical regions such as the European Union. The problem is
aggravated when some countries spend
public money on port development, while others
finance ports privately (UK) and both compete in the same market.
Development of container terminal capacity, including its
transshipment potential, will continue unabated; this is normal and, in the
long-run, port capacity follows international trade growth. But with one caveat: this infrastructure should
be priced (through the appropriate concession fees) in such a way so that
investment costs are eventually recovered, irrespective of whether the proceeds
from the concession remain with the port, or are returned to its financiers,
the latter including also the government. In this way, it does not really
matter who finances the investment, i.e. the public or the private sector, as
long as the private investor principle
applies; i.e. the terms of the financing are not very different from similar
private arrangements and, as said, this means that pricing should aim at cost
recovery.
Competition on infrastructure is indeed wasteful and
governments, like recently that of Italy, have often argued in favor of centralized port infrastructure
planning: something we used to do half a century ago, through the various National
Port Councils [I remember an advocate of this policy, Francesco Mariani, the
President of the Port of Bari, telling me recently that if a global carrier
would like to come to Italy, he should only talk to the Minister and it should
be he to tell him at which port he should call !]. In today’s Europe, however,
something like this wouldn’t only be wrong but, euphemistically, it would be
unthinkable: To my mind, the best planners of all are the (well-regulated)
markets themselves, together with transparency
in the financial flows between port and government.
The role of the public sector in financing container
terminals should therefore be limited, and where it exists, or is necessary, it
should take place on more or less commercial terms. In this way, limited would
also be the risk assumed by the public sector. Competition by neighboring
ports, excess capacity and similar concerns should lie only on the shoulders of
the concessioners (terminal operators) who should themselves assume such market
risks. It doesn’t in this way matter if excess capacity is created. To put it
bluntly, if things go well, we will all be raising a glass; if not, well, bad
luck. But the national taxpayer should not be bearing the costs (and risk) of private
investments, benefiting private users.
The above is easier said than done. If the terms imposed on
a private terminal operator, carrier or other, are too onerous, in all
likelihood he would be knocking on your competitor’s door. And this is where public policy intervention is necessary.
This can take only one form: an understanding that, no matter how terminal
investments are financed, container terminals are private goods and their costs should be recovered through user
charges; otherwise underpricing is
not much different than dumping,
sanctioned in many other sectors, including shipbuilding.
It seems the European
Commission, in its forthcoming State Aid
Guidelines, may be thinking differently, under pressure from powerful EU member
states and ports requiring considerable dredging (e.g. river ports). We will
soon know the outcome. HH
